In the bull run of 2003-2007, share buybacks were “all the rage”, says John Authers in the FT. Financing a firm with debt is cheaper than doing so with equity, and with credit cheap in the middle of this decade it made sense to replace equity with debt.
What’s more, buybacks boost earnings per share, since they lower the number of shares in circulation and also tended to be a more tax-efficient way of returning cash to shareholders than dividends. Companies became the greatest buyers of shares, reducing the supply of equity; buybacks were a “key driver” of the 2003-2007 rally.
But these days it’s a different story. With firms desperate to raise new equity, the pendulum has swung from “de-equitisation to re-equitisation”. Since the March low, American firms have sold a net $7.1bn of shares; weekly new share offerings hit a four-month high of $3.7bn, according to TrimTrabs.
The trend is nowhere near over, which bodes ill for the stockmarket, says Authers. The supply of equity is increasing and the biggest buyers of the past few years have become sellers, implying falling prices – or at least a brake on the pace of recovery if stocks have hit bottom.
TrimTrabs reckons that if the market upswing continues, tempting more firms into issuing new shares, they will “eventually swamp the rally”. It’s a similar story in Europe, where more shares were issued than were retired for the first time in five years in the first quarter, says Citigroup. About €200bn of equity is still to be raised over the next 18 months. Coupled with the results season, “this could halt the recent rally.”